Let’s talk about paying benefits in China. At least once a year I get an inquiry where a company wants to hire someone and will only hire them as a contractor and not as an employee.

I patiently tell them that China does not operate that way. Every person should belong to a legal entity in China. Sometimes they will not call me back as are miffed to hear this. I am sorry, but China does not do independent contractors.

Do Not Think You Are the Exception

Well, one caveat. Theoretically, a company could not register and hire a person and that person pays the social benefits. Chinese generally will not voluntarily pay any tax or benefit. Further, it is a big awkward headache for them even if they wanted. It is not practical for any Chinese employee to actually do that though they may tell you they will do that to get a job.

So that means if you set it up that way, you are illegal, and they are going to punish you. It is your responsibility. China is getting better at catching these year by year.

Paying Benefits in China is Not Optional

I am writing as two cases came in my door in the space of two weeks. One was a German company and the other a UK company. One did not register at all. The other had an entity but treated workers as contractors and gave no benefits at all.

Both were offended when I said this was illegal. We talked to the local Chinese leader of one, and he was conflicted. He knew he was not paying any benefits or tax to the government so taking more home. He also knew that if he fired anyone, they could report the whole thing, and they would be massively fined and maybe shut down. The Western leader is adamant that this is legal as a Chinese lawyer told him so. See also 8 Potholes in International Business in China.

The cases were different, but one line of facts was the same.

Both companies came to China and hired a Chinese lawyer and demanded to have these people as contractors and not as employees. The Chinese lawyers wanted to earn the money so folded. They set them up and said the workers would cover the benefits. The Chinese lawyer said they were legal, so when I tell them it is illegal, they think I am wrong! “Surely the lawyer knows more than you!” They think.

Both these companies have about a dozen people each. The workers know the company cannot mistreat them in any way. They can always shut the business down. Of course, they would lose their job, so both sides will be careful. Meanwhile the government is closing in on such behavior and mistreatment of Chinese workers by foreigners. The Chinese lawyers did them wrong.

It Takes Courage and Money To Change

It is hard to dig out of such a hole. If you tell the workers, that you are going to register a company or pay benefits, that means a person taking home 15,000 rmb a month, will suddenly only take home around 10,500. He will get the housing fund though, and that is tax free- about 1600 cash a month. Also 1600 he gets deducted goes to him tax free in housing fund.(3200 housing fund tax free is quite a benefit for worker). His overall tax burden is lower, but he probably paid no tax before.